Voting by Shareholders, page 1 of 3

VOTING BY SHAREHOLDERS (please read this for the general ideas only)

The corporate charter may provide for majority voting or cumulative voting of the board
of directors. If there are 12 candidates for 6 director positions, then the 6 candidates with
the most votes would win.

Majority Voting: Unless otherwise provided by state law or by the corporate charter,
majority voting applies. Under this system, each share entitles its owner to one vote. So,
an owner of 100 shares would have 100 votes that it could cast for each shares for a
candidate for position 1, 100 shares for a candidate for position 2, etc. Anyone with at
least 50% of the shares plus 1 share could elect all of the board members.

Cumulative Voting: The corporate charter or state law may provide for cumulative
voting. Under this system, each share gives the shareholder D votes, where D is the
number of directors to be elected. Someone with 100 shares voting on 8 board seats (D =
8) would have 800 votes. The shareholder could concentrate all 800 votes on a single
candidate, or spread the votes among several candidates.

Suppose that shareholder Jones plans to vote in a board of directors election. Assume
the following definitions:
n = number shares outstanding
D = number of directors to be elected
d = number of directors shareholder Jones wants to elect
X = number of shares Jones needs to ensure that Jones can elect d directors
nd
It can be shown that: X = D 1 + 1
(1)
So, if n = 1,000,000, d = 1 and D = 10, then (fractions are dropped):

nd 1,000,000 1
X = D 1 + 1 = 10 1
+ 1 = 90,910

Thus, 90,910 shares are needed to ensure electing one director out of the 10 to be elected.
The 90,910 shares provides Jones with (90,910 D) votes = 909,100 votes. By voting all
909,100 votes for a particular candidate, Jones is ensured of electing that candidate.

If n = 1,000,000, d = 2 and D = 10, then:

nd 1,000,000 2
X = D 1 + 1 = 10 1
+ 1 = 181,819

So, 181,819 shares are needed to ensure electing two directors out of 10. The 181,819
shares gives Jones (181,819 D) votes = 1,818,190 votes. Casting 909,095 votes for
each of two candidates will ensure the election of those two candidates.

1
 Voting by Shareholders, page 2 of 3

Staggered Boards: A staggered board of directors is one for which not all of the
directors are up for election at a given time. For example, the board term may be three
years, with one-third of the board up for election each year.

Take a look at equation (1). Notice that, for any given number of shares outstanding (any
given n), the smaller is the number of director positions to be voted on (the smaller is D),
the larger must be the number of shares (the larger is X) to elect any given number of
director (any given d). This means that staggering the board (having a small D in any
given election) makes it harder for a minority to elect even one director because the
minority needs more shares to elect a director. For example, if n = 1,000,000 and d = 1,
and if the firm has 10 directors with five seats up for election each year (D = 5), then:

nd 1,000,000 1
X = D 1 + 1 = 5 1
+ 1 = 166,667

Compare this with the 90,910 needed if all 10 directors were to be elected at the same
time. Similarly, again using equation (1), it would take 333,334 shares to elect two
directors (d = 2), rather than the 181,819 required if the board were not staggered and
there were 10 seats being voted on each year.

6/28/2004

2
 Voting by Shareholders, page 3 of 3